Date: 20101217
Docket: A-395-09
Citation: 2010 FCA 350
CORAM: SHARLOW
J.A.
PELLETIER
J.A.
LAYDEN-STEVENSON
J.A.
BETWEEN:
SCOTT OKE
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
PELLETIER J.A.
INTRODUCTION
[1]
Mr.
Scott Oke purchased a recreational vehicle (RV) and put it into a pool of RVs
leased to the movie industry through a third party. He claimed a substantial
deduction for capital cost allowance in relation to his RV for the 2003, 2004
and 2005 taxation years but the Minister disallowed the deductions by applying
the limiting rule in subsection 1100 (15) of the Income Tax Regulations,
C.R.C., c. 945 (the Regulations). Mr. Oke argued that the rule did not apply to
him because, as provided in subsection 1100(17.3) of the Regulations, his
activities with his RV amounted to a business in which he was personally active
on a continuous basis. The Tax Court of Canada, in a decision reported as Oke
v. Canada, 2009 TCC 386, [2009] T.C.J. No. 297 (Reasons), found that Mr.
Oke was not doing business using his RV and dismissed his appeal. Mr. Oke now
appeals to this Court from that decision.
[2]
For
the reasons which follow, I would dismiss the appeal.
FACTS
[3]
At all material times, Mr. Oke was successfully
employed as a senior sales executive. He became aware of the possibility of
earning additional income by buying and renting RVs. He came into contact with
Mr. Clements, the principal in Coast-to-Coast RV Inc., an RV management and
rental company which rents its fleet of RVs to movie production companies. Mr. Clement
was initially reluctant to accept Mr. Oke’s RV into his fleet but he relented
when Mr. Oke satisfied him that he would look after the routine maintenance of
his RV.
[4]
Mr. Oke was as good as his word and took an
active role in the upkeep of his RV, a problem which most other owners of RVs
in the pool left to Mr. Clements. Mr. Clements still had to attend to emergency
repairs simply because he was the contact person for Coast-to-Coast’s customers.
Mr. Oke also made sure that his RV was insured though he took advantage of the
more advantageous rates which Mr. Clements was able to obtain.
[5]
Mr. Oke took an active interest in Mr. Clements’
business and took on several tasks related to the rental of the RVs, including
his own. He participated in “show and tell” sales events where Mr. Clements
would “pitch” his fleet to movie producers. He assisted in shuttling RVs from
the Coast-to-Coast’s yard to the filming location. He also reviewed contracts
between Coast-to-Coast and movie producers. However, Mr. Clements personally
negotiated those contracts, without any assistance from Mr. Oke.
[6]
The following table shows Mr. Oke’s gross
revenues related to his RV, expenses before capital cost allowance, capital
cost allowance claimed and capital cost allowance allowed by the Minister in
the assessment of Mr. Oke’s income for the 2003, 2004 and 2005 taxation years:
|
Year
|
Gross
Revenue
|
Expenses
|
CCA Claimed
|
CCA Allowed
|
|
2003
|
$14,700
|
$9,405
|
$35,018
|
$5,295
|
|
2004
|
$12,795
|
$7384
|
$27,513
|
$5,411
|
|
2005
|
$19,425
|
$3,260
|
$22,259
|
$16,165
|
As can be seen, the application of the
limiting rule in subsection 1100(15) prevented Mr. Oke from using capital cost
allowance to create a loss in a taxation year.
LEGISLATION
[7]
The
scheme of the legislation is as follows. Subsection 1100(15) of the Regulations
limits the amount of capital cost allowance which may be claimed on account of
“leasing property”, a term defined at subsection 1100(17). That definition
turns on whether the property is used “principally for the purpose of gaining
or producing gross revenue that is rent, royalty or leasing revenue…”. To
determine whether revenue is rent, one looks to subsection 17.2 which provides
as follows:
|
(17.2) For the purposes of subsections (1.11) and (17), gross
revenue derived in a taxation year from
(a)
the right of a person or partnership, other than the owner of a property, to
use or occupy the property or a part thereof, and
(b)
services offered to a person or partnership that are ancillary to the use or
occupation by the person or partnership of the property or the part thereof
shall
be considered to be rent derived in the year from the property.
|
(17.2) Pour l’application des paragraphes (1.11) et (17), est
considéré comme un loyer dérivé d’un bien au cours d’une année d’imposition
le revenu brut dérivé, au cours de cette année :
a) du droit d’une personne ou
société de personnes (à l’exclusion du propriétaire du bien) d’utiliser ou
d’occuper le bien ou une partie de ce bien;
b) de services offerts à une
personne ou société de personnes qui sont accessoires à l’utilisation ou à
l’occupation du bien ou d’une partie de ce bien par la personne ou société de
personnes.
|
[8]
There
is an exception to this deeming provision at subsection 17.3 of the
Regulations:
|
(17.3) Subsection (17.2) does not apply in any particular
taxation year to property owned by
…
(b)
an individual, where the property is used in a business carried on in the
year by the individual in which he is personally active on a continuous basis
throughout that portion of the year during which the business is ordinarily
carried on; or
…
|
(17.3) Le paragraphe (17.2) ne s’applique pas, au cours d’une
année d’imposition donnée, à un bien qui appartient
…
b) à un particulier, dans le
cas où le bien est utilisé dans une entreprise que le particulier exploite
dans l’année et dont il s’occupe personnellement de façon continue, tout au
long de la partie de l’année où l’entreprise est habituellement exploitée;
…
|
[9]
The
result is that if subsection 17.3 applies, the revenue derived from an
undertaking involving the use of property is not considered to be rent; if it
is not rent, then the property is not one which is used principally for the
purpose of producing rent and therefore, the property is not a leasing property.
If it is not a leasing property, the limiting rule in subsection 1100(15) does
not apply.
THE DECISION UNDER
APPEAL
[10]
After
setting out the facts and the applicable portions of the Regulations, the Tax
Court Judge, Mr. Justice C. Miller, began his analysis by noting that in order
to come within subsection 1100(17.3), Mr. Oke had to meet two conditions. He
had to carry on a business in which the RV was used and he had to be active in
that business on a continuous basis for that portion of the year during which
the business is ordinarily carried on. The argument before the Tax Court Judge
focused on the extent of Mr. Oke’s involvement in the RV rental business. The
Tax Court Judge thought that the parties had jumped too quickly to the second
condition and had not addressed the first question, specifically whether Mr.
Oke carried on a business using the RV.
[11]
The
Tax Court Judge concluded that the RV was used in a business but that it was
not Mr. Oke’s business - it was Mr. Clements’ business, Coast-to-Coast. After
noting that Mr. Oke’s RV was but one in a fleet of thirty or more RVs managed
by Mr. Clements, that only Mr. Clements negotiated the terms of rental
contracts with movie producers, that Mr. Clements provided emergency repairs
for all the RVs and regular maintenance for all the RVs other than Mr. Oke’s,
the Tax Court Judge asked himself: “Were there two businesses at play?
Coast-to-Coast and Mr. Oke’s?” The Tax Court Judge answered his question
unequivocally: “No, only one – the business of Coast-to-Coast”: Reasons at
para. 20.
[12]
The
Tax Court Judge then reviewed each of the elements which Mr. Oke invoked in
support of his argument that he was carrying on business. That review showed
that, for the most part, the things which Mr. Oke did were things which any
other RV owner in the pool would do. For example, Mr. Oke claimed that he
determined the contracts to pursue. The Tax Court Judge found that Mr. Oke
pursued one client, Coast-to-Coast. Mr. Clements was the one who pursued the
movie industry clients.
[13]
In
the end result, the Tax Court Judge was not persuaded that Mr. Oke was carrying
on a business. He acknowledged that Mr. Oke’s situation varied somewhat from
that of other owners in the pool but concluded that, overall, “there are far
too few indices of carrying on a business to satisfy me that Mr. Oke’s source
of income was business and not simply property,” Reasons at para. 22.
[14]
Having
concluded that Mr. Oke was not carrying on a business, the Tax Court Judge did
not need to consider whether the latter was personally active in a business on
a continuous basis. Mr. Oke’s appeal was therefore dismissed.
MR. OKE’S SUBMISSIONS
[15]
Mr.
Oke’s appeal to this Court was based on the argument that the Tax Court Judge
erred in applying an unduly restrictive view of what constitutes a business for
purposes of the Income Tax Act R.S.C. 1985 c. 1(5th Supp.)
(the Act).
[16]
Mr.
Oke began by setting out the definition of “business” which appears at
subsection 248(1) of the Act:
“business” includes a
profession, calling, trade, manufacture or undertaking of any kind whatsoever
and, except for the purposes of paragraph 18(2)(c), or section 54.2, subsection
95(1) and paragraph 110.6(14)(f), an adventure in the nature of trade but does
not include an office or employment.
[17]
Mr.
Oke then turned to the jurisprudence. He quoted the definition of business
found in a number of cases in support of his position that the threshold for a
business is very low. In particular, he referenced the English Court of
Appeal’s statement that “[a]nything which occupies the time and attention and
labour of a man for purpose of profit is business,” Smith v. Anderson,
(1880) 15 Ch. D. 247 (Eng. C.A.) at p. 258. This definition of a business has
been referenced by the Supreme Court of Canada as the origin of the test to
distinguish between business and property income, see Stewart v. Canada,
[2002] 2 S.C.R. 645, 212 D.L.R. (4th) 577 at para. 51 (Stewart).
[18]
The
appellant also referred to the case of Drumheller v. Minister of National
Revenue, [1959] C.T.C. 275 (Ex. Ct.), to support his proposition. In that
case, the Exchequer Court of Canada stated:
“In particular, the expression an
undertaking of any kind appears to me to be wide enough by itself to embrace
any undertaking of the kinds already mentioned in the definition; that is to
say, trades, manufactures, professions, or callings, and any other conceivable
kinds of enterprise as well.”
[19]
After
referring to cases where, on the facts, certain activities were found to fall
within the definition of business, Mr. Oke invoked the decision of the Supreme
Court of Canada in Stewart, above. In that case, the Supreme Court of
Canada set aside the “reasonable expectation of profit” as a test of whether a
taxpayer’s activities constitute a source of income for tax purposes. The
taxpayer in that case purchased four rental properties which he leased to
parties with whom he dealt at arm’s length for the purpose of producing rental
income. Unfortunately, he did not realize a profit from this activity due to
high interest rates.
[20]
The
Supreme Court set out a two part test to determine whether a taxpayer’s
activity constitutes a source of income. The first step is to determine if the
activity is undertaken for profit or if it is personal in nature. If the
activity is not personal in nature, then the next question is whether the
source of the income is business or property, Stewart, above at para.
50.
[21]
In
this case, there was no suggestion that Mr. Oke’s involvement in leasing his RV
had a personal element. It was undertaken with a view to profit. Mr. Oke argues
that there was therefore a source of income, and since it fell within the words
“an undertaking of any kind”, the Tax Court Judge ought to have found that it
was a business. Even if Mr. Oke’s objective was to learn the RV leasing
business, this would still qualify as an adventure in the nature of trade, and
thus a business.
[22]
Mr.
Oke then went on to examine the nature of his involvement in his business so as
to show that he met the second leg of the test set out at subsection 1100(17.3)
of the Regulations. In light of the conclusion to which I have come on
the first leg, it is not necessary to pursue this aspect of the matter.
STATEMENT OF ISSUES
[23]
This
appeal turns on whether Mr. Oke can establish that his activities relating to
the rental of his RV constitute a business. Stewart teaches us that even
where there is commercial activity, it does not necessarily follow that the
activity is a source of business income. It could be income from property. In
this case, the commercial activity involved the leasing of property. The
question in this appeal is not whether Mr. Oke’s activity was a business rather
than a mere personal activity but rather whether Mr. Oke’s commercial activity
was a business (generating business income) or whether it simply generated income
from property.
ANALYSIS
[24]
This
is an appeal from a decision of a trial judge, reached after the trial of an
issue. The standard of review is therefore that set out in Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235: correctness for errors of law,
palpable and overriding error for questions of fact and questions of mixed fact
and law. Where an extricable error of law can be found in a question of mixed
fact and law, the standard of correctness applies to that question of law.
[25]
In
this case, the question of whether Mr. Oke’s activities were sufficient to
constitute a business is a question of mixed fact and law. Determining the test
to be used to decide what is a business or business income as opposed to income
from property is a question of law.
[26]
As
noted above, there is a distinction between commercial activity and personal
activity. As between these two alternatives, the threshold for business is very
low, as demonstrated by the statutory definition which refers to “an
undertaking of any kind whatsoever.” When the issue is the characterization of
a given commercial activity, the test is somewhat more demanding. In Stewart,
above at para. 51, the Supreme Court of Canada, briefly touched upon the
relevant considerations:
Equating "source of
income" with an activity undertaken "in pursuit of profit"
accords with the traditional common law definition of "business",
i.e., "anything which occupies the time and attention and labour of a man
for the purpose of profit": Smith, supra, at p. 258; Terminal
Dock, supra. As well, business income is generally distinguished from
property income on the basis that a business requires an additional level of
taxpayer activity: see Krishna, supra, at p. 240.
[27]
The focus on the level of activity is reflected
in a line of jurisprudence dealing with real estate rental properties: Wertman v.
M.N.R. ,
[1964] C.T.C. 252, 64 D.T.C. 5158 (Ex. Ct.); Walsh v. M.N.R.,
[1965] C.T.C. 478, 65 D.T.C. 5293 (Ex. Ct.); Burri v. The Queen,
[1985] 2 C.T.C. 42, 85 D.T.C. 5287 (F.C.T.D.) – and the case Canadian
Marconi Co. v. The Queen, [1986] 2 S.C.R. 522, [1986] 2 C.T.C. 465, 86
D.T.C. 6526 (S.C.C.) [Canadian Marconi] which applied this line of
reasoning more broadly.
[28]
The
cumulative effect of these cases was summarized by Peter W. Hogg, Joanne E.
Magee and Jinyan Li, Hogg et al., Principles of Canadian Income Tax Law,
7th ed. (Toronto: Carswell, 2010) at 160:
Prima facie, of course,
the rents derived from letting an apartment building, office building or
shopping centre, are income from property. The rents are paid for the use of
the property, not services provided by the landlord. The difficulty arises from
the fact that a landlord will often supply to tenants, in addition to the right
to occupy the rented premises, services of various kinds. Where the services
supplied consist of only those services which are of a kind customarily
included with rented premises, for example, maintenance of building, heating,
air conditioning, water, electricity, and parking, the rent is still regarded
as income from property. But if the services supplied go beyond those which are
customary for an office building or apartment building or shopping centre (or
whatever the property is), it becomes more plausible to characterize the
owner’s operation as a business rather than the mere letting of property.
Services provided by an apartment building that would be indicative of a
business classification would include services normally provided by a hotel,
i.e., housekeeping, laundry service, restaurant and room service, etc. The
extreme case is, of course, a hotel, where the extent of the services supplied
to guests makes it obvious that it is a business. Where the range of services
supplied by the landlord falls below hotel level, it becomes a question of
degree whether the nature and extent of the services makes it appropriate to
characterize the income as earned from a business.
[29]
This line of cases supports a comparative
approach to the question of whether income is generated by a business or arises
from the use of property. The higher the level of activity, the more likely it
is that one is engaged in a business; the lower the level of activity the more
likely it is that the income derives from the use of property.
[30]
In this case, the Tax Court compared Mr.
Oke’s level of activity relative to other RV owners in Coast-to-Coast’s pool
and found that Mr. Oke’s level of activity relative to his own RV did not
differ significantly from that of other (admittedly passive) owners. In my
view, this was the correct test. At the conclusion of that analysis the Tax
Court Judge found that “there are far too few indices of carrying on a
business to satisfy me that Mr. Oke’s source of income was a business and not
simply property,” Reasons at para. 22. As this question is one of mixed fact
and law, the requisite standard of review has been met.
[31]
This is consistent with the Tax Court’s
Judge’s earlier conclusion that there was only one business in this scenario
and it was Coast-to-Coast’s.
CONCLUSION
[32]
Mr. Oke’s argument was, in essence, that he
was engaged in commercial activity. The Tax Court Judge correctly identified
the issue as whether that commercial activity was a business or whether it was
simply the use of property to generate income.
[33]
The Tax Court judge applied the correct
test to differentiate between business income and income from property and
arrived at a conclusion which cannot be challenged as being unreasonable.
[34]
For these reasons, I would dismiss this
appeal with costs.
"J.D.
Denis Pelletier"
“I
agree.
K.
Sharlow J.A.”
“I
agree.
Carolyn
Layden-Stevenson J.A.”
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